The Myth of a ‘Competitive’ Economic Policy

An American economy that cares a great deal about boosting domestic productivity requires policy-makers who care very little about global competitiveness.

A Zen koan for the nationalistic ‘90s? The sound of one Keynesian clapping? A lyric for aspiring autarkists?

None on the above. It’s the startling pronouncement of MIT’s Paul Krugman, one of the country’s most brilliant young economists, a nonpartisan academic with a reputation for intellectual honesty and a cruel tongue.

You might recall that Krugman was widely quoted criticizing industrial-policy economist Laura D’Andrea Tyson’s research when President Clinton named her chairwoman of his Council of Economic Advisers.

Alternating between statistical scalpels and macroeconomic machetes, Krugman bloodily eviscerates “competitiveness” as a policy doctrine without any kind of economic validity.

What supply-side “economics” was to Reaganomics, Krugman asserts, competitiveness has become to Clintonomics: a sort of psuedo-rational pastiche that Nobel Prize-winning chemist Irving Langmuir once described as “pathological science”--that is to say, no science at all.

“To make a harsh but not entirely unjustified analogy,” he says in his essay “Competitiveness: A Dangerous Obsession” in the current issue of Foreign Affairs, “a government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good science policy, even in areas that have no direct relationship to the theory of evolution.”

“Gee, we must be making progress,” smiles Dan Burton, president of the Council of (sigh) Competitiveness, which was formed by frustrated high-tech executives in the wake of the Ronald Reagan Administration’s rejection of its own presidential commission on the topic. “In 1987, competitiveness was dismissed as a buzzword. Today, it’s graduated to being a dangerous obsession.”

Might Krugman be the one with the dangerous obsession? Not after you see the numbers. His arguments would command respect even without his impeccable credentials. They’re important because he takes the global competitiveness champions like Tyson, U.S. Trade Representative Mickey Kantor, Labor Secretary Robert B. Reich and health care guru Ira Magaziner on their own terms, impatiently redoes their arithmetic for them and makes a strong case that competitiveness issues amount to little more than a rounding error in the $6-trillion U.S. economy.

“It’s a dead end of a type we’ve seen before,” says Krugman, who is comparably harsh in his assessments of Reagan’s supply-siders and former British Prime Minister Margaret Thatcher’s monetarists. “You take something with a grain of truth and some people seize on it. . . . Here, some characters have taken small conflicts of interest between countries and decided to build an economic policy around them.”

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But why do so many hardheaded business people find “competitiveness” so alluring?

“Because people generalize from their own experience,” Krugman asserts. “The experience that a CEO gets is one of global competition, but even the CEO of a large multinational has a worm’s-eye view of world trade.”

Krugman takes no economic prisoners. He apologizes for what he says was an out-of-context quote criticizing Tyson in the New York Times and in the next breath statistically demolishes a competitiveness argument Tyson recently put forward in the Wall Street Journal.

“Laura Tyson had an article about expanding the Japanese market for American goods,” recounts Krugman, “so that we’d have not just more jobs but better jobs. She said, at best, we could sell another $20 billion annually. Now, let’s suppose all of these new jobs are high-tech. We know that average value-added for these jobs is about $80,000 per year.

With that volume of trade, we’re talking about creating 250,000 high-tech jobs (as opposed to non-high-tech jobs). In essence, we’re talking about giving 250,000 people an extra $6,000 a year. That’s just over $1.5 billion a year. A billion and a half dollars a year is 1/40th of a percent of GNP.

“So,” Krugman concludes, “if we get everything we want from trade in Japan, we will get an increase of 1/40th of 1% in our national income. Now, suppose I’m wrong at each stage of my calculation by a factor of 2. We’re still only talking about one-tenth of 1% of GNP. Is that what we really want in our relationship with Japan? What’s so shocking about ‘competitiveness’ is, when you go beyond the rhetoric and see what’s at stake, you find the stakes are absurdly low.”

The clear policy implication?

“I think we should talk about the productivity of the whole U.S. economy,” says Krugman, “not just the parts of the economy that happen to be in competition with foreign rivals.” This Administration’s focus on global competitiveness, he fears, is undermining the far more vital issue of stimulating productivity.

“Where I disagree with Paul Krugman is that the international reference point is really important,” maintains the Competitiveness Council’s Burton. “To ignore the impact of the quality movement, the push toward lean manufacturing and reduced cycle times is to underestimate competitiveness’ profound impact on American business. . . . Reducing it to numbers is to miss the point. Adjusting to world markets is how a lot of American enterprises are getting organized.”

In fact, Krugman’s analyses of competitiveness do not address the underlying dynamics of innovation, evolving business practices or the changing culture of economic enterprises. He is simply looking at the outputs based on rigorous econometric analysis. In fact, he freely acknowledges that the social forces underlying productivity may well be far more important than any economic policy he and his brethren might devise.

“It’s fascinating,” says Krugman. “I believe that sociology is more important than economics. I just don’t know how to do it.”

So, in the wake of Krugman’s unambiguous numbers, expect the competitiveness debate in the 1990s to shift from the economic battlefield to the social battlefield. A White House Council of Sociological Advisers, anyone?